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Paul Smith

Hello. A warm welcome to the latest PMI-based podcast from S&P Global Market Intelligence. I'm Paul Smith, an economist in the team that produces PMI data from around the world. And I'm delighted to be joined today by two colleagues to talk over things, PMI, for the next 20 minutes or so. So firstly, hello to our regular contributor, economist, Andrew Harker. Good afternoon, Andrew. Hope all is well.

Andrew Harker

Thanks for that. All good. Glad to be back in the studio. Today, I'm particularly looking forward to talking about another PMI launch, which would be about our newly released Kuwait PMI.

Paul Smith

Excellent stuff. And secondly, we've got David Owen, also one of our economists in the team here at S&P Global. So welcome, David. Welcome back for, I think, your second appearance on our podcast after a little bit of a gap. Welcome back, and I'm sure you've also got some great content for us to discuss this afternoon.

David Owen

Hi, folks. Thanks for having me back on the podcast. I was surprised to realize how long that was, I was on the podcast, but it's good to be back, and I look forward to discussing some of the latest PMI results, especially from the Middle East and North Africa region that I cover.

Paul Smith

Fantastic. We look forward to that. But first, I wanted to just discuss something that I think has been one of the more interesting themes of 2024 from an economics and financial markets perspective, that's been a bit of a reassessment of central bank policy.

Like I said, from the perspective of financial markets, broadly speaking, forecasts for the number of expected rate cuts in 2024 by some of the major financial institutions, like the U.S. Federal Reserve, have definitely been dialed back compared to what we thought, time frames and magnitude of these, reduction in rates would occur in 2024 compared to where we were at the end of last year.

Now I think one of the reasons for that is probably inflation rates, have probably not come down to a sufficient degree that makes some of these policymakers comfortable enough to think that the so-called job on inflation has been done. No doubt, inflation rates are much, much lower than they were, say, in 2022. But generally, they remain above target rate. It's what we would probably refer to as a little bit of stickiness in inflation at the moment.

And from my perspective, I think you can see that in the PMI data, our global composite indices on output prices, input prices have both settled around about two or three points above their pre-pandemic averages and probably remain inconsistent with target rates around the world for central banks. So I'm hoping amongst these, we can give a little bit of insight to what is causing inflation to remain a little bit above target and a little bit sticky at the moment.

If I can come to you first, David, what can you tell us about what I would say is a fairly crucial component of inflation trends, so that’s wage setting? What are you seeing with regards to salaries, et cetera, within our PMI data sets?

David Owen

Yes. Wage pressures have definitely been a big factor keeping inflation higher than normal for businesses. And this has been especially true for the past year or so after initial shock of inflation we've gotten back in 2022 for managing material costs. Firms were then keen to manage wages to keep workers on because of the cost of living crisis. And this has really come through the PMI data. So I've actually been on the podcast before to talk about the PMI common trackers, which I'm sure is still getting a lot of love on this podcast.

They basically look at the frequency of mentions from our global firms about things like wages, also material costs, shipping prices. And in April, we actually saw this rise quite sharp, play among services firms globally. We saw comments about higher wages rise to about 6x greater than normal.

So it's definitely a key driver of inflation at the moment and is clearly a hot topic for central banks as they look to see whether the labor markets will start to call and find a bit of a down on wages before they start to cut interest rates.

Paul Smith

Definitely remain consistent with the PMI. Output and input pricing, this is there and it's still above normal rates. Just turning to you, Andrew, the pass-through of wages and other costs is key in determining what underlying or core consumer price, inflation prices look like. What can you tell us about firms pricing power at the moment?

Andrew Harker

Just to build on what's already been said really, if you look at on the output prices that firms are charging, so when they're able to charge their customers for their products, they're still rising quite sharply, especially in the service sector. So if you look at the services output prices index, as I think you mentioned, Paul, it's still above that pre-pandemic average despite having come down from the peaks of 2022.

And just to pick out an example. If you look at Japan, services output prices there are actually rising at the fastest pace for a decade. So it's going all the way back to the sales tax increase of 2014 if people can remember back to those days.

And you mentioned central bank policy as well as the Japan central bank actually raised interest rates for the first time in 17 years in March. So they're certainly not looking at cutting at the moment. And I think that's a good example of some of the pressures that are still remaining in the system.

Paul Smith

From both ounces that we pushed ourselves quite down the supply chain in terms of services companies. I wonder what it's like a little bit backwards in the supply chain, what manufacturers are seeing? Price pressures are quite contained on me. Would you say, Andrew?

Andrew Harker

Well, I think so recently that might have been the case, yes. Certainly, there's been a period where prices in the manufacturing sector have been relatively low or falling even. But if you look at the April data, for example, you can see that that's changing a bit. Global manufacturing input costs rose at the fastest pace in just over a year in April.

So definitely some signs of pressures coming back through. And that's maybe coinciding with signs of just manufacturing demand picking up and showing signs of improvement. They've been in a period of weakness really in manufacturing globally, but that seems to be turning a bit of a corner and then that's feeding through to some rising price pressures.

Paul Smith

So lots to think about there, it's still a little bit outside of normal ranges across the supply chain. So definitely something to look out for in the coming months with our data. A little bit of a pivot, I think, here and for our third podcast in a row. We have news, as Andrew hinted at the start there, of another PMI launch to talk about. So at the end of last year, we launched a new survey for Canada Services PMI.

And then early in the year, we have the remaining manufacturing PMI. But in April, we launched another new PMI, so that was for the Kuwait economy. So I wonder, Andrew, if you could tell us a little bit more about the survey.

Andrew Harker

Like those big red London buses, isn't it? We wait for ages for a PMI launch to come along and then you get three all at once. But as you say, at this moment, we're talking about Kuwait, which we launched in April, this is a whole economy. So for whole economy, that means we're covering a range of sectors, including manufacturing, services, construction and wholesale and retail. And so that's what we do in a number of economies in the MENA region. So the Kuwait once in line with that.

We've actually been collecting data in Kuwait since September 2018. So if my math is correct, that's just over 5 years of data that we've got there. So quite a decent length of the back history for us to look at. And just to mention as well on release dates, in common with a general pattern from whole economy surveys in the region, we released the Kuwait data on the third working day of the month. So if people are interested, they can head out to our website on the third working day and get the latest news on Kuwait.

Paul Smith

Just to stress, I think a word you missed out there was overall. The data are not produced to include the overall producing sector. It's pretty much everything in the private sector economy apart from overall production, which is fairly common, of course, across most of our MENA surveys that we produce across the region. I guess one thing that's always really interesting when we do our launches is to get an update and idea of what we're seeing with the latest PMI results. Could you maybe shed some light on that, Andrew?

Andrew Harker

So there's been quite a good spot of growth actually in Kuwait in overall private sector in recent months. So we've actually seen 15 consecutive months now of increases in both output and new orders, which is the best span of growth that we've seen since the survey began back in 2018. So quite a positive picture.

And if we look at what companies are attributing this to, often, it's linked to competitive pricing and the offering of discounts to customers to support demand. Some mentions of advertising and successful marketing campaigns as well, but primarily companies are linking it through to that competitive pricing, which is helping them to secure new business.

Paul Smith

That's a little bit of a contrast, isn't it, to what we were talking about earlier, where we've got a global level in some countries and territories around the world. We're seeing output pricing, especially is a little bit elevated. I guess the question is how Kuwait companies are actually able to keep their selling price inflation so low at the moment? And can it continue?

Andrew Harker

No, it's becoming more difficult, actually, because their own input costs are actually starting to rise quite sharply. And so that's proving a bit tricky now for firms, they're caught in a bit of a dilemma where their costs are rising quite sharply, but they're looking to keep their selling prices low. And so what we've actually seen in April is that firms are looking to save costs wherever possible.

So they lowered employment for the first time in 8 months in April. And that had the knock-on effect of leading to a rising backlogs of work. So that means that companies basically are not able to completely fulfill all the orders that are getting in over the month because they haven't got the capacity they need to be able to do so. So that's obviously limiting the pace of output growth.

And so it feels like we're reaching a bit of a crossroads now where firms have got that dilemma and they have to decide whether they want to start raising their prices a bit more and testing the strength of demand or whether they're going to try to keep that lead on cost and potentially limiting their own capacity. So something to watch out for really in the months ahead.

Paul Smith

Yes. That's what I was about to say. I guess that's going to be something that's a bit of a crossroads and whether that's a sustainable situation there remains to be seen. I think I've been spoken a little bit here about Kuwait, having David on as a guest, he did a lot of work for us around the MENA region. So I think it would be a good opportunity to bring David in here and talk a little bit more about some of the other countries in the Middle East and North Africa.

Maybe we could go to Egypt first, David. It feels to me having made some of the excellent research you've done in this area that is available on our website to freely read. It's been a bit of a roller coaster, I think, the last few months.

Think in part of something that we were talking about on our last podcast, some of the challenges in the Red Sea and reduced shipping through the Suez Canal and something that I hadn't really thought about too much myself was the effect on the revenue generation for some of the Egyptian authorities. So I wonder if you could give us a little bit more context and background to that situation.

David Owen

Absolutely, Paul. So to recap for listeners, we've seen attacks from the Milton Group in Yemen on shipping vessels in the Red Sea region since late last year. This has led to many global freight companies to divert their shipments away from the Red Sea and the Suez Canal and to go around the coast of Africa instead, so much longer shipping, more than normal.

But what this has meant is a lot less traffic passing through the Red Sea and the Suez Canal. And the Suez Canal is actually quite a major source of foreign currency for Egyptian authorities. And this was actually already at quite low levels because of other factors like reduced tourism after COVID and also high food prices due to the war in Ukraine.

So it was already a quite limited levels, but an event from the Red Sea has placed even more pressure on currency reserves and as a result, foreign exchange rates, especially with the U.S. dollar, which is used quite a lot of imports.

Now the official rate was actually fixed, the businesses tended to use a much higher market rate when they are purchasing their imports. At the same time as this, we saw inflation rise to 36% back in February. And this was actually backed up by our own PMI data, which showed that price pressures for businesses were quite steep.

Paul Smith

So obviously, that was a couple of months ago. I wonder whether you could outline some of the policy responses. And of course, how that's been translated through into the most recent PMI data that we have, which is, of course, for April.

David Owen

We actually saw quite a big policy response from this shock to the economy. And so in early March, the Monetary Policy Committee in Egypt got together for an emergency meeting and they came out with two key responses. The first of this was to raise interest rates by a whole 6%. And the second was to float the Egyptian pound against the U.S. dollar to move from that fixed rate.

Now the aim here, of course, was firstly to improve foreign currency reserves, but also to improve the exchange rate the business actually faced, and this did actually have the intent of effect of bringing down that market rate a bit and aligning it with where the official rate was now. Not only that also paved the way for greater funding from the International Monetary Fund which was actually announced that same day as that meeting, and this has already led to positive effects for the Egyptian economy.

So in our latest PMI results, which, as you say, looked at April business conditions for the Egypt and on private sector, we saw cost pressures for businesses fall to the lowest level in 3 years. At the same time, we saw the actual inflation rate has fallen to just under 32%.

And well, of course, that does sound quite extreme, but the PMI data does suggest that a softening trend is likely to continue. We've also seen business forecasts for future activity strengthen quite notably in April. So that does show that they've been a lot more confident that these changes will support our own business conditions.

Paul Smith

That's a really great example of how important the PMI data can be in these situations. So obviously, you've got a fairly extreme event a couple of months ago, a policy response and the timeliness of our figures really does help to show policymakers and people who are interested in our data and how powerful it can be in helping understand how these events affect an economy.

Something else happened in April was some extreme rainfall of flash flooding in the UAE, particularly we saw in Dubai around the airports and the local area of the effects of that heavy rain. Obviously not quite the same as what happened in Egypt, but another kind of event. I just wonder whether that was something that you picked up in the PMI data for April for the UAE.

David Owen

I suppose this is quite a different shock to what we saw in Egypt, but still one that we've seen has had an economic impact. So if anyone who didn't know, the UAE actually experienced this largest rainfall event on record in April, with some areas seen more rain in 24 hours than they normally do for a whole year. So unsurprisingly, you said to flash floods and closures of the airport in Dubai and other transport hubs and services.

But not only it was just due to the heavy rain but also because a lot of country lacks drainage systems. Here in the U.K., you might be used to a heavy storm or two, it's a very different story. And the UAE is probably more akin to us having a snow in the winter and everything grind into a halt as a result. But bringing us back to the PMI as ever, we did get a quite immediate snapshot of how these rains have impacted firms.

And what we did mainly see was a sharp loss of growth in demand for firms, mainly as customers stayed at home and businesses cut their own spending. So our new orders index, which basically looks at sales for firms. That dropped to 14 months low in April, showing a quite a sharp loss of demand momentum for firms.

Not only that, but a reduction in business operations over that time meant that firms also saw quite a steep rise in their backlogs of work, which is another indicator that Andrew, I think, mentioned earlier. So that really shows that business capacity was hurt by this event.

Paul Smith

Just to take your point on the U.K. on rain and on now I'm pleased to report it's currently raining here, where I am at the moment, to confirm how much rain we do get over in the U.K. Just on the UAE data though, I guess it does feel like that was a temporary effect. And maybe on a more underlying basis, the growth profile in the UAE still looks quite good, employment continuing to rise. Is that a fair assessment?

David Owen

Yes, definitely. You're right. Growth is still pretty strong in the UAE. And actually, the PMI, it dropped to 55.4% in April, and that was an 8-month low, but that's still quite strong and higher than most of the countries that we track with the PMI business service. Actually, linking this back to Kuwait, similar to we've seen in UAE is this trend of competitive pricing.

So firms, likewise, are often cutting their prices to try and boost demand. And this has definitely helped to keep demand quite resilient and activity growing strongly recently. None is, I guess, firms generally expect to recover quite quickly from these floods. So on the whole economy, it is still in a pretty good position for this year.

Paul Smith

It's a nice link back there as well to some of the margin pressures that may be coming down the line, but I could see here that the underlying growth profile remains pretty strong. So as ever I think we've unpacked a lot during this episode, but we have run out of time for further discussion today.

So please do keep up to date with our headline PMI data and our calendar release dates and of course, some of the great research that we do as a team from looking at the PMI and linking it as we have done today into various economic themes from around the world, that can all be accessed via our S&P Global website. So thanks to you, Andrew, and to you, David, of course, for your insights. And we look forward to seeing you all later in the year.

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